Global stocks may gain a bit more yet following a five-month rally in which they recouped the last leg of ground lost since the global financial crisis, says the head of investment strategy for Russell Investments.
Andrew Pease, who heads forecasting and asset class valuation for the global wealth manager, sees the share markets in the US, Australia and emerging economies about 10 per cent below fair value - a gap he expects to narrow by the end of next year.
New Zealand's sharemarket - one of the best performing bourses globally in the second half of the year - is about fairly priced, he said.
Pease admitted, though, the global economy is still vulnerable to the US fiscal cliff, a $600 billion round of tax hikes and spending cuts which kick in at the end of the year, and a further deterioration in the protracted eurozone sovereign debt crisis.
"It's amazing to see what has been thrown at us, the uncertainty, and how equities have performed," he said. "Looking forward it's difficult to see that sustained, but we are looking at solid single digit growth."
That bodes well for New Zealand investors and retirement savers, who for the first time since 2007 have started to see growth funds outperform more conservatively invested vehicles - a key feature to building sustainable long-term returns.
Pease sees the equity market momentum driven by modest economic growth in the US, with gross domestic product expected to expand at a pace of 2 per cent to 2.5 per cent in 2013.
The key driver though will be a pick up in new house construction.
This measure has lagged population growth and the world's biggest economy since the GFC, and is now starting to catch up with official figures showing builders broke ground on almost 900,000 homes last month - the highest level since 2008.
"New homes are a massive economic multiplier because they need new fridges, furniture, carpets, roads built to them as well as other new infrastructure," Pease said.
He expected US politicians will avert the full impact of the fiscal cliff with another down-to-the-wire deal, because left unchanged it would knock 3 per cent off US GDP and plunge the country into recession.
Similarly, he expects European policymakers to continue patching fiscal holes among its member states.
However, he's certain officials will be forced to let Greece default on the debt held by the European Central Bank and other international economic organisations.
That's going to deliver high levels of volatility to markets, but won't drive the bond rally any further in Pease's view.
He said fixed interest delivered a total return of about 8 per cent so far this year, with government bond yields at record lows - which he see as unsustainable.
However, he's not picking the bond market to collapse either.
"Don't expect the bond bear market to start soon. Bonds are super expensive but with modest wage growth, low inflation and the (US Federal Reserve) not raising interest rates until 2015, it's hard to see where the trigger will come from," he said.
New Zealand is expected to keep growing, supported by strong demand for soft commodities such as dairy, but Pease warned the high level of the currency could disrupt the Kiwi economy.
- © Fairfax NZ News
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